Vadodara, Gujarat-based Manpasand Beverages Ltd (MBL), known for MangoSip – a mango drink brand, and OXY Sip – a packaged drinking water, is suddenly in a centre of controversy as Central GST Commissionerate of Vadodara,Gujarat has unearthed a ₹ 40 crore (~ US$5.75 Mn ) goods and services tax (GST) scam in the company, which is backed by private equity firm SAIF Partners, which hold 25% stake in MBL.

According to Business Standard, citing CGST commissionerate sources, MBL allegedly created and showed sales and purchases across more than 30 fake units.

In a latest, MBL founder Dhirendra Singh, his brother Hashvardhan Singh, Managing Director Abhishek Singh and chief financial officer Paresh Thakkar were arrested after a raid on May 23 by the Central GST Commissionerate Vadodara for GST fraud amounting to ₹40 crore.

It was in 2011, when the private equity firm SAIF Partners reportedly picked up a 25 percent stake in MBL for Rs 45-50 crore, with an earnings multiple of 30.

The report further said that ever since Deloitte resigned as auditor for Manpasand Beverages has been in controversy, which is then eventually came out open when top management executives of MBL were arrested cementing the speculations.

Established in 1998, by current Chairman and Managing Director Dhirendra Singh, MBL boasted its presence in rural and tier-2 and 3 markets when its multinational competitors were ruling the metros and top cities.

By 2018, the company was congratulating itself on reaching out to these markets with a distribution strength of 600,000 outlets.

“MBL was also on its way to setting up its fourth plant in the country. Its manufacturing plants in Vadodara, Varanasi and Sri City are either operational or under construction,” said the report.

Usually the cases one comes across show companies running real units, but acquiring fake invoices here and there to claim input tax credit (ITC). But in case of MBL, it has been found that the company set up several fake units and across the country at that. Real purchase and sale transactions were then shown with values inflating with each transaction in order to claim a cumulatively large sum of input tax credit,” a source said.

The company allegedly showed inter-unit transactions worth over Rs 300 crore wherein ITC would come up to Rs 40 crore. Government sources said that these transactions were found to have taken place in 2018-19.

In this case, MBL allegedly showed inter-unit transactions worth Rs 300 crore, which led to an accumulation of input tax credit (ITC) of Rs 40 crore. According to CGST commissionerate sources, the transactions took place on several occasions in 2018-19, beginning three-four months ago.

Independent chartered accountants and corporate law experts who have followed the case said the circular trading involved one of the real units showing a sales transaction to a fake unit, which is then followed by a string of similar transactions, adding a slight margin at each stage and eventually landing up as a purchase transaction by a real unit of MBL.

“The real unit which shows purchase in the end can now claim tax credit on the inflated value at each stage. Mostly, it is even difficult for auditors to find out such a long trail of 30 fake units because there are no RoC (Registrar of Companies) records. Also, there is no law in the country that prohibits such kinds of circular trading. Only CGST intelligence can smell it when they follow the trail on their system and find that these are similar or even same transactions shown again and again,” said an independent corporate law expert.

For SAIF, which is investor in companies like Book My Show, MakeMyTrip, Paytm and FirstCry among others, MBL is not its first portfolio firm that came into controversy as earlier an another SAIF Partners-backed Infrastructure Leasing & Financial Services (IL&FS) came in to controversy for alleged fraud and causing wrongful loss to the troubled infrastructure lender.

Last month, a former vice chairman of IL&FS, Hari Sankaran, was arrested by Serious Fraud Investigation Office (SFIO). He is accused of granting loans to entities that were not credit-worthy or declared as non-performing accounts causing loss to the company and its creditors.

Coincidentally, IL&FS also had Deloitte as its auditor at that time and according to SFIO the initial probe revealed the existence of major lapses in Deloitte’s audit of IL&FS subsidiary.